International Tax Planning in a Time of Uncertainty
Tax, Estate Planning, and Asset Protection
Considering the uncertainties caused by the COVID-19 pandemic, whose predatory effects-economic and social-are far from over, it’s extremely important to implement a strategy to protect your assets. Individuals and businesses are experiencing substantial losses, which require comprehensive tax planning. In addition, making sure that a proper estate plan or an updated one is in place will give you peace of mind and an assurance that your loved ones will be protected during difficult times. Below are some rising issues and recommendations for your consideration.
Tax Implications Caused by Immigration
Generally, a citizen of a foreign country who wishes to enter the U.S. must first obtain a visa. Either a nonimmigrant visa for temporary stay, or an immigrant visa for permanent residence. Immigrant and nonimmigrant visas can help a person attain U.S. residency, but may also expose them to the U.S. federal tax system. A person is not subject to U.S. income tax unless he or she is a U.S. citizen or U.S. resident for federal tax purposes. The U.S. taxes the worldwide income of its citizens and residents; thus, your visa may expose you to U.S. income taxation. For a full discussion on how the U.S. tax system classifies individuals, see our previous article on this topic here.
The taxation of one’s worldwide income is an unfamiliar position to be in and may result in unfavorable results without the proper planning in place. There are several opportunities for a person to prevent or minimize their exposure to the U.S. federal tax system and the perverse effects of two different countries taxing your income.
Exposure to Gift, and Estate Taxation
In addition to U.S. federal income taxation, a person should also be mindful of the exposure to U.S. gift and estate taxation. A person’s residency status for purposes of gift and estate taxation is not the same as residency for purposes of federal income tax. Whether a person is subject to U.S. gift and estate tax depends on the person’s domicile. Domicile is acquired when a person resides in the U.S. with no definite present intention of leaving the U.S., this is a subjective test. Proper tax planning will limit an individual’s exposure to both U.S. federal income, gift and estate taxes.
Estate Planning considerations
In addition to the tax considerations mentioned above, it is import to consider having or updating your estate plan in the U.S. A tailored estate plan will not only offer tax advantages but will also guarantee that you and your family are protected.
If you die while being a domiciliary of the U.S., a judicial process called probate will be required to obtain authorization from a court of law to dispose of your assets to your legal heirs. A probate process can be lengthy and expensive, and even more when considering the ramifications of owning assets in more than one jurisdiction, which most times require coordination of foreign legal processes to acknowledge the validity of an order issued by a U.S. judge.
It is possible to avoid probate with the proper estate plan. Moreover, there might be situations where an individual is unable to act or is incapacitated. An estate plan can provide legal authority on how to proceed with the management of your property and personal affairs, including the ability to give health care and medical instructions.
Basic estate planning documents generally include a will, trust, durable power of attorney, a healthcare power of attorney, and guardianship designations if minor children are present.
Profits, Losses, and Asset Protection
As mentioned above, these unchartered waters have caused and will continue to cause substantial losses to individuals and businesses. These losses may be associated with investments, debts, stocks, controlled foreign corporation (“CFC”) income, and net operating losses. Taking advantage of every opportunity available to maximize profits and protect assets is extremely important in these times as it can result in the success or failure of one’s assets and business. The tax benefits of a loss will depend on the proper alignment and timing of that loss as it relates to income that would traditionally be subject to tax. Planning accordingly will require a look at the factors causing the location, character and timing of the losses. However, as unfortunate as the current situation is, we are hopeful that we will recover, and business will eventually be back as usual. Proper planning at this time will help you and your business overcome the effects of the pandemic.
This is a brief overview of the key tax issues to be considered during COVID-19, be on the lookout for a webinar discussing the topics above in depth.
Every situation is unique and should be evaluated individually. Barbosa Legal has a team of experienced attorneys specializing in international taxation who can properly analyze the facts of your particular situation and provide advice customized to your needs.